Could the global energy crisis herald a cleaner and more secure future?

The International Energy Agency (IEA) has published its annual World Energy Outlook (WEO), which provides critical insights into future energy scenarios. This blog summarises its key findings.

1. The ‘golden age’ of natural gas is over

Russia’s invasion of Ukraine has sparked a global energy crisis and is prompting a reorientation of global energy trade and the end of the ‘golden age’ for natural gas.

Russia was the world’s largest exporter of fossil fuels until it cut the natural gas it supplied to Europe and European sanctions on imports of oil and coal. Consumers have been exposed to higher energy bills and supply shortages, stoking inflationary pressures and contributing to a looming risk of recession. Governments have reacted by committing over $500 billion¹ to shield consumers from the impacts.

Is Europe’s loss China’s gain? The IEA indicates that this is not the case due to a lack of immediate infrastructure availability and weak future gas demand growth.² As such, the IEA’s Stated Policies Scenario (STEPS), which reflects current policy settings, shows that Russia’s share of internationally traded oil and gas could halve by 2030.³

The IEA also articulates that Russia’s actions will catalyse the end of the era of growth in natural gas demand. The STEPS indicates that demand for natural gas plateaus by the end of the decade⁴ due to higher near‐term prices; rapid deployment of heat pumps, renewables and efficiency measures; and a faster uptake of other flexibility options in the power sector. However, liquified natural gas (LNG) looks to remain crucial.

2. We’re headed for a 2.5°C rise by 2100

Stated climate policies will result in a global average temperature rise of 2.5°C.⁵

Alongside short-term measures to shield consumers from the impacts of the crisis, many governments are now taking longer-term steps to enhance energy security and meet their climate commitments. Examples include the US Inflation Reduction Act, the EU’s Fit for 55 and REPowerEU packages, and Japan’s Green Transformation (GX) programme.

Despite this, the IEA’s STEPS points to a global average temperature rise of about 2.5°C by 2100, which is aligned with the conclusions of the 2022 Emissions Gap Report published by the United Nations Environment Programme.⁶

The IEA’s Announced Pledges Scenario (APS) does provide some hope, as it indicates the rise in temperature by 2100 will be limited to around 1.7°C. However, APS assumes that all climate commitments made by governments around the world will be met in full and on time.

For STEPS and APS to become aligned, government pledges must be backed by policy.

3. Clean energy investment needs to double

If STEPS is realised, clean energy investment rises to above $2 trillion by 2030. This is welcome, but to meet the IEA’s Net Zero Scenario, it needs to increase to $4 trillion.⁷

This shows the need to attract new investment to the energy sector and address the divide in clean energy investment levels between advanced and emerging and developing economies.⁸ The IEA believes it is therefore essential that governments and investors address the risks and barriers (e.g., granting/accessing permits) that deter financial flows to these areas of the world.

Furthermore, stronger policies are essential to drive the global increase in energy investment needed to reduce the risks of future price spikes and volatility.

Conclusion: the energy transition cannot wait

Today’s energy crisis provides a stark reminder of why we must press ahead with an orderly energy transition.

The pathways presented by the IEA show that if we want to meet the demands of the energy crisis and limit the global average temperature increase to 1.5°C, then instead of simply expanding fossil fuel investment, we should look to energy efficiency, demand response measures and the allocation of capex to clean energy.

LGIM will continue to support the objective of net zero through its stewardship activities, including engaging with companies via our Climate Impact Pledge.

1. IEA, World Energy Outlook 2022, page 19.

2. IEA, World Energy Outlook 2022, pages 24 - 25

3. IEA, World Energy Outlook, page 24

4. IEA, World Energy Outlook 2022, page 21

5. IEA, World Energy Outlook 2022, page 21.

6. UNEP, Emissions Gap Report 2022.

7. IEA World Energy Outlook 2022: A new energy security paradigm is needed for secure transitions https://www.iea.org/reports/world-energy-outlook-2022/executive-summary

8. IEA World Energy Outlook 2022: A new energy security paradigm is needed for secure transitions https://www.iea.org/reports/world-energy-outlook-2022/executive-summary